The Hindu Business Line : Will bank claims get priority over cane dues?

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Will bank claims get priority over cane dues?

Recovery certificates issued to sugar mills in Uttar Pradesh

In a nutshell
Sugar stocks, often the factory and other assets are hypothecated to the bank.
Banks can file a counter-claim that their dues will take precedence over that of growers.
There are two earlier cases where SC verdict has gone in favour of cane growers.

Harish Damodaran

New Delhi, Oct. 29 The Uttar Pradesh Government has issued recovery certificates (RC) against 63-odd private sugar mills that have not made full payments to cane growers during the 2006-07 crushing season (October-September).

‘Arrear of land revenue’

The issuance of these certificates under Section 17 (4) of the UP Sugarcane (Regulation of Supply & Purchase) Act, 1953, empowers the district magistrate concerned to recover the amount of cane dues and interest thereon “as if it were an arrear of land revenue”.

It means that the authorities can simply seize not just the sugar stocks, but even the plant and machinery, land and bank accounts of the defaulting mill and auction these for realising the cane amounts due (as specified in the RC issued by the Cane Commissioner to the Magistrate).

Not so simple

But according to some millers, things are not as straightforward. The reason for this, they say, is that the sugar stocks lying in mill godowns are mostly pledged with the banks.

Since they already exercise a lien on the stocks, it is the banks that have first charge over the sugar seized by the authorities. “Not only the sugar, but very often even the factory and other immovable assets are hypothecated to the bank. We are only trustees for the bank, which is the principal,” the millers claimed.

In the event of the seized sugar being sold, the banks can file a counter-claim that their dues would take precedence over that of growers.

The Government then ends up being a recovery agent for the banks – quite opposite to the legislative intent!

Banks normally lend up to 85 per cent of the value of the stocks, assessed at current ex-mill prices or on a previous three months’ average (whichever is lower).

“At best, only 15 per cent of the value of sugar sold can be used to discharge cane arrears. The remaining realisable sums will necessarily go to the banks,” the millers added.

SC RULINGS

This point is, however, disputed by Mr V.M. Singh, Convenor of the Kisan Mazdoor Sangathan.

“Section 17 (4) makes it clear that once the district magistrate receives the RC from the Cane Commissioner against a mill, he shall proceed to recover cane arrears by auctioning its stocks and other assets. There is no mention of bank claims taking precedence over cane dues anywhere in the Act. On the contrary, there have been at least two Supreme Court judgments (SKG Sugar versus State of Bihar and Joara Sugar versus State of Madhya Pradesh) affirming the primacy of dues to cane growers,” he claimed.

‘GOING SLOW’

Mr Singh further accused the UP Government of going-slow after the issuance of RCs in compliance with the September 25 order of the Allahabad High Court’s Lucknow bench.

“Over a month has gone by since the first set of RCs were issued and yet why has no auctioning of mill assets even started?” he quipped.

As on October 18, private mills in UP owed growers Rs 1,122.11 crore out of the total Rs 9,091.94 crore worth of cane bought during the 2006-07 season.

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